Chapter 18: Foreign direct investment in Mexico

Handbook Chapter

Extract

One of the prime motivations for Mexico to pursue a North American Free Trade Agreement (NAFTA) was to attract more foreign direct investment (FDI) (Tornell and Esquivel, 1997). FDI is generally seen as an important source of external financing for developing countries and has been the largest source worldwide for a number of years. Affiliates of multinational enterprises (MNEs) embody new and advanced technology and knowledge capital, leading to potential spillovers that may improve the performance of domestically owned firms. Foreign firms also tend to pay higher wages. Taken together, these factors should enhance aggregate growth. In addition, FDI adds employment opportunities when surplus labor is present. In the Mexican context, this was viewed as an important component of NAFTA as it was expected to stem the flow of migrants to the United States as a result of an improved Mexican economy. However, the evidence on the effects of an increased presence of MNEs has not been unambiguously positive, for Mexico or any other developing country in general. Spillovers to other firms in the same industry may not occur as MNEs safeguard their knowledge capital closely. Their superiority may squeeze out local firms or at least reduce their market share, thus driving up average cost and reducing measured productivity. Increased demand for local factors may drive up their price and thus further raise costs for domestic firms.

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